Broad monetary condition index: An indicator for short-run monetary management in Vietnam

Abstract

We construct broad monetary condition index (MCI) for monetary policy management in Vietnam. MCI is composed of key monetary transmission variables including interest rate, exchange rate, credit and stock market price. Weights of composite variables are derived from reduced form IS-PC framework and impulse response function based on vector autoregressive model with data in first difference form and difference-with-long-term-trend form. The best MCI is chosen based on three criteria: its causal relationship with output growth, its ability to explain output growth in short-run and its out-of-sample performance in forecasting output growth. Movement of chosenMCIindicates that the indicator has two essential characteristics of a supporting index for short-term monetary policy management, including quick responses to monetary policy changes and close relation with policy goal.